The moment you decide to become a Forex trader, your priority task will be to reduce risk. If you want to earn a profit, you have to identify, minimise and control risk. You are doing business in one of the greatest financial markets of the world, so you have great chances to make a profit. But you also expose yourself to risk and you can experience great loses if you do not go through a thorough research process before you start trading.
Do you know what Forex risk is?
Simply explained, it’s the potential profit or loss you get because of the volatility of the market. To minimise your financial loss you will have to design some risk management strategies and take certain precautions.
Before listing the 5 main strategies that will help you manage the Forex trading risks, let’s see what the risks are and who else is trading in the market.
On the Forex market act insurance companies, private institutions, investment banks, retail traders, hedge funds and other types of investors. This piece of information will help you understand who controls the outcome of the market, the institutions that manipulate the supply, demand or volume or trades.
What are the main Forex trading risks?
The exchange rate risk
Currencies experience multiple changes in their value daily, so at every millisecond a different change is affecting your open positions. When using a trading platform you will find the risk manifested as SPREAD.
The interest rate risk
The interest rate risk can boost the SPREAD range, especially if you choose to trade with floating and not fix spreads. As stated before these SPREADS are changing fast and they can increase the risks you are facing. At certain moments, floating spreads can jump even 10 pips from the initial ASK price. These are the interest rate decision moments, they arise at certain moments for every state.
The liquidity and country risk
You will notice that the exchange currency features are lower than the Forex liquidity, and they vary the most during the European and the US trading hours. In addition, numerous states or groups of countries have decided to limit the amount by which the price of certain exchange rates can change during a given period. These bans are remote but you can experience their effect if you are trading from a county that is placed on the banned list.
The leverage risk
Higher leverage doesn’t necessarily mean higher risk, you can gain a profit if you know how to make use of it. You have to be careful if you are using aggressive leverage because it can increase the loss if you are having an unfavourable performance.
Ways to manage the Forex trading risks
- Stop-loss
Trading is similar to driving when it comes to the loses you can get, you should not drive a vehicle at a high speed if you have no brakes, and you should not trade Forex if you don’t have a stop-loss. You should decide what the right stop-loss for you is, and you should not reduce it, no matter what the situation is.
It’s advisable to have a hard stop because it will execute the operation when the prices get to a certain point. It will function more effectively than a mental stop loss because it will force you to get out of the trade and will not allow your emotions to affect your decisions.
- Reduce the use of leverage
You will find tantalizing to use leverage to grow your profit, but it can easily lead to great financial loses if you take high leverage. If a single quick change happens in the market, it will disrupt your entire trading operations. Do not allow it to alarm you, you should assess the risk and create a plan to protect yourself for reducing it. If you want to make a profit, you should be persistent and play the long game.
Do not compare it to playing roulette, you have to stay in the game for as long as it takes the Edge to play out numerous trades. It’s advisable to cap out leverage at a maximum of 10:1.
- Limit your trading during volatile conditions
This rule may get you confused because everyone states that volatility is great because it helps you gain profit from price changes. We agree with this statement, but we point out to the cases when high-risk events influence the market. There are low chances you to earn if you trade during these moments.
You should take a break from trading during the moments when news announcements are highly anticipated because they can lead to great up and down spikes immediately after the release of the news.
- Keep educating yourself
The best strategy to trade successfully is to know how the market works. The market is constantly changing and you should keep up with the latest updates. You should thoroughly research the market before you choose your broker. It’s advisable to choose an Australian ASIC Forex broker because it guarantees you that it conducts their operations reliably and they safely and responsibly hold your funds. ASIC has very strict requirements for brokers to get their licenses, and they meticulously check their business activities to offer you support.
If you want to stay ahead of the game, you should always be willing to do research and teach yourself.
- Focus on long-term strategies
Overtrading is one of the actions that pose the greatest risks when trading. You should not have the erroneous belief that the more often you trade, the higher the profit will be. This can be a dangerous activity. It’s advisable to stick to a swing trading time horizon, operations that are held from two to ten days. The chart patterns and resistance levels these timeframes come with have greater chances of success. You can reduce the risk of financial loses and it will help you control your emotions and impulses to overtrade. In addition, this strategy will help you cut down transaction costs that can greatly affect your profit.
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Contributed content
Founder Dinis Guarda
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